Morgan Stanley Downgrades Spirit Air As Stock Is Now 'Less Compelling'

• Shares of Spirit Airlines Incorporated (NASDAQ: SAVE) have declined 34.5 percent year-to-date, touching a low of $46.95 on September 29.
• Morgan Stanley’s Rajeev Lalwani has downgraded the company from Overweight to Equal-weight, while lowering the price target from $66 to $53.
• Lalwani expects the industry, and therefore the company, to continue to struggle due to higher capacity with subdued pricing. Although the stock still has upside, Lalwani views it as “less compelling.”

Analyst Rajeev Lalwani elaborated that the company’s recent update implies that the current environment is “worse than previously expected, particularly in lower demand periods,” such as 4Q15.

Lalwani believes that “these trends are unlikely to abate given our forecast of elevated supply, low fuel, and high returns - a negative for SAVE in particular given the carrier's sensitivity to aggressive pricing activity resulting from its low fare structure.”

Although Spirit Airlines’ growth story remains intact, margins are expected to decline close to the industry average. Lalwani also expressed concern regarding visibility into price stabilization, which is unlikely to appear well into 2016 or beyond.

According to the Morgan Stanley report, the company is likely to continue to see unit revenue deterioration in 4Q15 and beyond. Capacity growth in the domestic market during 2016 is expected to stay in the 4-5 percent range, significantly higher than the expected traffic growth.

“As such we anticipate unit revenues for the industry overall to be down modestly, which when considering SAVE's lower base fares, the airline will continue to see a more magnified impact since it is more levered to industry pricing,” Lalwani stated.